Adair Turner, the chairman of the UK Financial Services Authority, and Hector Sants, the watchdog’s chief executive, today gave evidence to the influential Treasury Select Committee of MPs on the changing face of financial regulation.

The regulatory bosses answered questions on the break-up of the FSA and the creation of the Financial Conduct Authority, one of two successor bodies being set up to regulate UK financial services from the end of next year.

10.06
Hector Sants says the causes for failure over the last decade came from a “variety of different sources”, although it was not directly his fault. He says it was, in part, the fault of the original mandate drawn up for the FSA and that several issues had built up over the decade. He says: “These have occurred over the last decade and had built up, some have crystallised during my period, notably PPI, but they all had origins prior to my time as chief executive.”

10.12
Hector Sants says the FSA has hired “some 200” risk specialists since the financial crisis, saying the regulator is now better placed to make its own judgements of the quality of banks’ trading positions and adds that it did not have risk specialists pre-2007. He also says: “We have full transparency from all our major banks as to their positions and that was not the case in 2007-2008.”

10.20
Lord Turner says that UK banks' direct exposure to Italy is “not very large” – something that was revealed in the stress tests conducted earlier this year. He adds that the “bigger issues” arise if problems in Italy have consequences for other continental banks and the wider eurozone.

10.24
Lord Turner says the top line objective of the FCA needs to be cleared up. Its remit includes protecting and enhancing confidence in financial services and markets – something which, he says, should be a role for the prudential regulator, while the FCA ought to focus on fostering fair, efficient and transparent markets.

10.28
Margaret Cole says there are no bankers currently in prison in the UK as a result of the financial crisis. She says that the draft legislation for the FCA does not include the framework for sending bankers to prison and that it would be a matter for parliament to consider. Andrew Tyrie, chairman of the Treasury Select Committee, says he can “imagine what the public are thinking” and that it would be looked at again.

10.40
Hector Sants says there is a “confused structure” for the oversight of competition in the current draft legislation, where he would like to see a removal of “overlap” between the FCA’s oversight of competition and the control of the Office of Fair Trading.

10:49
Martin Wheatley, the chief executive designate of the FCA, says a remit for the FCA to enhance the competitiveness of the UK’s financial services industry “creates several conflicts” and that it would not be a good thing. However, he adds that “people are attracted to a well regulated structure” and that enhances the UK’s competitive position, but that competitiveness of the UK on a global stage should not be a direct remit of the regulator.

10.57
Hector Sants says he is “extremely sorry” for the impression that the FSA was holding parliament in contempt for dismissing its recommendation in July that the retail distribution review, a reform of financial advice, should be delayed. He says: “It wasn’t our intention to generate that impression [that we held parliament in contempt]. The reality was I think we felt under media pressure to respond to the report which was in the media domain.”

11.10
Asked whether the criminalisation of mismanagement of financial services should be brought in, Martin Wheatley responds: “We would have to be very careful about what we consider as criminal actions." He says that the introduction of criminal sanctions could increase the challenge of attracting good people to top jobs in banking. He says: “Clearly, there is a trade-off between risk and reward”.

Margaret Cole says that she is “extremely wary” about the introduction of criminal sanctions for financial institutions. She says where there is fraud, there are clear rules. Although she adds that a better alternative to criminalisation would be more stringent rules around the banning of individuals found guilty of taking reckless actions to prevent them from taking important posts in the financial services sector in the future.

11.28
On the FSA budget and the future budget of the FCA, the chiefs agree that they have the balance right at present. Lord Turner says that the salaries are “reasonable” to attract the best talent from outside, pointing to Martin Wheatley as an example. Lord Turner says: “Clearly, we do not pay salaries at the level of the private sector, and we don’t need to, but we do need some freedom." He adds that he FCA will continue to “strike a balance” between the level of pay needed to attract talented regulators and the need for cost-effective regulation.

11.47
Asked whether the UK’s representation in Europe had been damaged by the break-up of the FSA, Hector Sants says that it has been “undoubtedly affected” in the short term. He says: “Some of the turnover in our senior staff has undoubtedly affected our representation on the key European regulatory committees.”

He adds: “The process of splitting up the FSA has been somewhat disruptive to our representative ability.” However, he says that in the long term he is “content” that there is clarity of responsibility over who will represent the UK to the key European regulators.

11.56
Lord Turner says: “In an ideal world you probably wouldn’t have decided to do major structural change amid the biggest financial crisis of the modern capitalist system. But admits: “We are where we are." He adds that the “biggest challenge” facing the FSA at the moment is for it to go through major structural change, whilst receiving major legislation from Europe amid a “very fragile” financial system. Lord Turner says: “It’s a major challenge, but I’m confident the executive is thinking about it very systematically."